Dollar jumps today on safe haven flows on report of "probable terrorist attack" in Germany. In addition, markets were also nervous on the Russia/Turkey issue after Russian ambassador to Turkey was fatally shot. Meanwhile, the greenback is supported by Fed chair Janet Yellen's upbeat comments on the employment conditions. The dollar index surges to as high as 103.65 so far, breaking near term resistance at 103.56 to resume recent up trend. The index is on course to medium term projection target at 105.19. In the currency markets, Sterling is so far the weakest one for the week, followed closely by commodity currencies and Euro. Yen, despite today's weakness, is supported mildly by risk aversion with the Swiss Franc.

On the data front, Canada wholesale sales rose 1.1% mom in October. UK CPI realized sales rose to 35 in December. Eurozone current account surplus widened to EUR 28.4b in October. German PPI rose 0.3% mom, 0.1% yoy in November. Swiss trade surplus widened to CHF 2.6b in November.

Yesterday, Fed Chair Janet Yellen's keynote speech at the University of Baltimore did lift yields a bit. While not offering hints for the monetary policy outlook, Yellen was upbeat over the employment conditions. As she suggested that the US is at "the strongest job market in a decade" and that "there are also indications that wage growth is picking up". However, she also added that that productivity growth was disappointing.

BoJ offered a brighter view on the economy after keeping monetary policies unchanged. Interest rate was held at -0.1% and the asset purchase program was also kept unchanged under the yield curve control framework. The vote on YCC was by 7-2 vote with policymakers Sato and Kiuchi opposing. The central bank noted in the statement that "Japan's economy continues to recover moderately as a trend", with consumption "moving on a firm note".Though, CPI is expected to be "slightly negative or about 0 percent for the time being. BoJ also noted that risks to the outlook including development in "emerging and commodity exporting economies", particularly China; developments in US; and Brexit. Separately, the Japanese government projected the real GDP to grow 1.5% in the year starting next April, revised up from prior projection of 1.2%. Nominal GDP growth is projected to be 2.5%, up from prior projection of 2.2%. CPI is forecast to be at 1.1%, down from prior estimate of 1.4%. Meanwhile, the initial budget for next fiscal year is JPY 97.5T, a mild 0.8% from the current year.

RBA minutes for the December meeting warned of the high levels of household debt due to low interest rates. The central bank left its cash rate unchanged at 1.5% this month. As suggested in the minutes, "over recent years, the board had sought to balance the benefits of lower interest rates in supporting growth and achieving the inflation target with the potential risks to household balance sheets…Members recognized that this balance would need to be kept under review". The central bank remained cautious over the job market, reiterating that there was "considerable uncertainty" about the employment situation and "there was expected to be excess capacity in the labour market for some time, which was consistent with further indications of subdued labour cost pressures". More in RBA Minutes Unveils Concerns Over Elevated Household Debts.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0370; (P) 1.0425 (R1) 1.0457; More.....

EUR/USD's fall resumes after brief consolidation and intraday bias is turned back to the downside. Current decline is part of the larger down trend and should target 100% projection of 1.1298 to 1.0518 from 1.0872 at 1.0092, which is close to parity. On the upside, above 1.0479 minor resistance will turn bias neutral again for consolidations.

In the bigger picture, break of 1.0461 key support indicates that consolidation from there has completed as a triangle at 1.1298. And, the down trend from 1.6039 (2008 high) is resuming. Current downtrend is now expected to target 61.8% projection of 1.3993 to 1.0461 from 1.1298 at 0.9115. On the upside, break of 1.1298 resistance is needed to confirm medium term bottoming. Otherwise, outlook will stay bearish in case of rebound.

Economic Indicators Update

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RBA in its minutes for the December meeting cautioned the high levels of household debt due to low interest rates. It also warned of the 'considerable uncertainty' in the labor market. The central bank maintained a neutral bias at the meeting while leaving its cash rate unchanged at historic low of 1.5%. Note the meeting was held a day before the release of 3Q15 GDP growth which shrank -0.5%.

The minutes unveiled that policymakers were concerned about the 'high levels' of household debts. As suggested in the minutes, the 'members discussed the effect of lower interest rates on asset prices and the decisions by households to borrow, particularly given the already high levels of household debt'. It added that 'the Board had sought to balance the benefits of lower interest rates in supporting growth and achieving the inflation target with the potential risks to household balance sheets. Members recognized that this balance would need to be kept under review'.

Another area of concerns was on the employment market. Despite the recent decline in the unemployment rate, the members acknowledged that 'all of the growth in employment over 2016 had been in part-time employment'. They also noted that 'wage growth had remained low and continued to be lower than implied by the historical relationship with the unemployment rate'. There was still considerable uncertainty about the momentum in the labour market.

Australia's GDP contracted -0.5% q/q in 3Q16. It was the 4th time of economic contraction in the country in 25 years. The December RBA meeting was held a day before the release of the report. We look forward to the February meeting which would be the first meeting that the RBA would react to the contraction.

On global economic developments, RBA discussed the problem of capital outflow in China and the FOMC rate hike. While FOMC rate hikes might worsen the capital outflow issue in China and other emerging economies, it might help alleviate RBA's concerns over strong Australian dollar.

Yen weakens mildly today even though BoJ offered a brighter view on the economy after keeping monetary policies unchanged. Interest rate was held at -0.1% and the asset purchase program was also kept unchanged under the yield curve control framework. The vote on YCC was by 7-2 vote with policymakers Sato and Kiuchi opposing. The central bank noted in the statement that "Japan's economy continues to recover moderately as a trend", with consumption "moving on a firm note".Though, CPI is expected to be "slightly negative or about 0 percent for the time being. BoJ also noted that risks to the outlook including development in "emerging and commodity exporting economies", particularly China; developments in US; and Brexit. Separately, the Japanese government projected the real GDP to grow 1.5% in the year starting next April, revised up from prior projection of 1.2%. Nominal GDP growth is projected to be 2.5%, up from prior projection of 2.2%. CPI is forecast to be at 1.1%, down from prior estimate of 1.4%. Meanwhile, the initial budget for next fiscal year is JPY 97.5T, a mild 0.8% from the current year.

Released earlier in the day, the RBA minutes for the December meeting warned of the high levels of household debt due to low interest rates. The central bank left its cash rate unchanged at 1.5% this month. As suggested in the minutes, "over recent years, the board had sought to balance the benefits of lower interest rates in supporting growth and achieving the inflation target with the potential risks to household balance sheets…Members recognized that this balance would need to be kept under review". The central bank remained cautious over the job market, reiterating that there was "considerable uncertainty" about the employment situation and "there was expected to be excess capacity in the labour market for some time, which was consistent with further indications of subdued labour cost pressures".

In US, Fed Chair Janet Yellen's keynote speech at the University of Baltimore did lift yields a bit. While not offering hints for the monetary policy outlook, Yellen was upbeat over the employment conditions. As she suggested that the US is at "the strongest job market in a decade" and that "there are also indications that wage growth is picking up". However, she also added that that productivity growth was disappointing.

On the data front, Swiss will release trade balance today. German PPI, Eurozone current account and UK CBI realized sales will also be featured. Canada wholesale sales will be released in US session.

GBP/JPY Daily Outlook

Daily Pivots: (S1) 143.98; (P) 145.64; (R1) 146.75; More...

GBP/JPY formed a temporary top at 148.42 and turn into consolidation. The pair recovered mildly after breaching 4 hours 55 EMA but stays in range. Intraday bias remains neutral for sideway trading. Further rally is expected as long as 142.98 support holds and above 148.42 will target long term fibonacci level at 150.43. As rebound from 122.36 is seen as part of a correction pattern, we'd be cautious on topping at 150.43 on first attempt. Meanwhile, considering bearish divergence condition in 4 hours MACD, break of 142.98 should confirm short term topping and turn bias to the downside for 55 days EMA (now at 138.53).

In the bigger picture, the down trend from 195.86 top (2015 high) should have made a medium term bottom at 122.36 after hitting 100% projection of 195.86 to 154.70 from 163.87 at 122.71. Rise from there is now expected to develop into a medium term corrective pattern. Further rise should be seen to 38.2% retracement of 195.86 to 122.36 at 150.4. We'd expect strong resistance from there to limit upside. But sustained break there will extend the rise to 61.8% retracement at 167.78.

Economic Indicators Update

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Euro stays soft against Dollar in spite of better than expected confidence data. German IFO business climate rose to 111.0 in December, up from 110.4, above expectation of 110.7. Current assessment gauge rose to 116.6, up from 115.6, above expectation of 115.9. Expectations gauge rose to 105.6, up from 105.5, above expectation of 105.5. Ifo president Clemens Fuest noted that "the German economy is in a festive mood."And, "assessments of the current business situation improved, reaching their highest level since February 2012. The business outlook for the first half of 2017 is also slightly more optimistic. The German economy is making a strong finish to the year."

S&P maintained Australia's AAA credit rating with negative outlook. The rating agency warned that "the government's worsening forecast fiscal position, as outlined in its latest budget projections earlier today, further pressures the rating". And, it remains "pessimistic about the government's ability to close existing budget deficits and return a balanced budget by the year ending June 30, 2021". Fitch and Moody's maintained Australia's rating at AAA with a stable outlook. Also from down under, New Zealand NBNZ business confidence rose to 21.7 in December, building permits rose 2.6% mom in October.

BoJ announcement will be the focus in the coming Asian session. The central bank is widely expected to keep policies unchanged, with interest rate at -0.1% and uses the Yield Curve Control framework to cap long term interest rates. Recent sharp depreciation on the Japanese yen eased much pressure on BoJ to add stimulus. Australia will also release RBA minutes.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.0405; (P) 1.0440 (R1) 1.0479; More.....

A temporary low is in place at 1.0365 and intraday bias is turned neutral for consolidation. Upside of recovery should be limited below 1.0669 minor resistance and bring fall resumption. Below 1.0365 will extend that larger down trend to next near term target at 100% projection of 1.1298 to 1.0518 from 1.0872 at 1.0092, which is close to parity.

In the bigger picture, break of 1.0461 key support indicates that consolidation from there has completed as a triangle at 1.1298. And, the down trend from 1.6039 (2008 high) is resuming. Current downtrend is now expected to target 61.8% projection of 1.3993 to 1.0461 from 1.1298 at 0.9115. On the upside, break of 1.1298 resistance is needed to confirm medium term bottoming. Otherwise, outlook will stay bearish in case of rebound.

Economic Indicators Update

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Dollar surged broadly last week as Fed delivered the expected rate hike and painted a more hawkish rate outlook for 2017. Dollar index resumed the long term up trend and reached a 14 year high at 103.56 before closing at 102.95. In particular, EUR/USD took out 1.0461 key support level and reached the lowest level since 2002. Nonetheless, Yen and commodity currencies were hardest hit. Rally in Dollar was accompanied by extended rally in treasury yields as 10 year yield breached 2.6 handle before closing at 2.597. Gold suffered deeper selling on dollar trend to close at 1136.8 while WTI crude oil pared back much of the post OPEC gains to close at 51.90. However, stocks turned mixed despite Fed raising GDP projection for next year. DJIA struggled to power through 20000 handle and closed the week slightly higher at 19843.31. The markets may turn into consolidation mode as holidays approach. But strength in Dollar will likely carry on to early next year.

To recap last week's central bank activities, Fed increased the policy rate by 25 bps for the first time in a year. While this had been widely anticipated, the 'dot plot' indicated that the members expect three hikes in 2017, up from two previously. The accompanying statement was in a hawkish tone, upgrading the assessments to the economic outlook. The members reinforced that 'near-term risks to the economic outlook appear roughly balanced. Fed Chair Janet Yellen made no hint on how the new fiscal policy would affect the monetary stance. Yet, she stressed there is non-negligible uncertainty regarding the new policy. More in Fed Raised Rates by +25 Bps, Expects Three Hikes In 2017.

Three major European central banks held monetary meeting last week, including BoE, SNB and Norges bank. All left their policy rates unchanged. Moreover, all pointed to higher uncertainty in the global economic outlook. BoE kept its Bank rate unchanged at a record low of 0.25%. The sizes of government and corporate bond purchases also stayed unchanged at435B pound and up to 10b pound, respectively, in December. Policymakers warned that the recent strength in sterling might cool inflation in the medium-term. SNB held deposit rate steady at -0.75%, while Norges bank left kept its deposit rate steady at 0.5%. More in BOE, SNB, Norges Bank On Hold After Fed's Rate Hike.

10 year yield took out 2.489 key resistance after some hesitations in recent week. The strong break indicates that markets have made up their mind after FOMC meeting last week. Current up trend should extend to 3.036 resistance next in medium term. From the long term perspective 3.036 will now be a key resistance to overcome. But decisive break there will complete a double bottom pattern (1.394, 1.336) will bullish convergence condition in monthly MACD, which will be a strong sign on long term trend change. This could be the defining point in first half of next year.

Dollar index's up trend has resumed for next medium term target at 61.8% projection of 78.9 to 100.39 from 91.91 at 105.19. A major question in the long term outlook is whether current rise from 91.91 is the fifth wave of the whole rise from 71.69. Normally, in that case, 105.19 could be a strong resistance level which the dollar index would be repelled back through prior resistance at 100.39. However, considering that EUR/USD has just took out 1.0461 support to resume the long term down trend, which will likely break parity easily based on current month. EUR/USD is indeed projected to head to 0.9115 in medium term. Hence, even if the fifth wave scenario holds, Dollar index would still likely extend to 100% projection at 113.40 before making an important top. But in any case, 105.19 is the level to pay attention in first quarter of next year.

Regarding trading strategies, firstly, we're holding on to our AUD/USD short (sold at 0.7550). The position looked shaky as the consolidation pattern from 0.7310 was longer and stronger than we expected. Nonetheless, while AUD/USD recovered to 0.7523, it was held below our stop at 0.7550. Subsequent sharp fall now affirmed our bearish view. That is, the medium term correction pattern from 0.6826 has completed and long term down trend is resuming for a new low. We will hold on to the short position, lower the stop to 0.7450. 0.7144 support is the first target but we'll most likely not exit at that point. 0.6826 is the second target in medium term. Stay tuned and we'll keep updating the strategy every week.

Secondly, EUR/USD dipped to 1.0504 last week and recovered to 1.0669. Then the pair finally dived through 1.0504 support. Our sell EUR/USD on break of 1.0504 was triggered. As noted before, EUR/USD should have resumed the long term down trend from 1.6039. Parity would be the first target but we're looking at next medium term projection target at 0.9115. To give the down trend a little breathing room, we'll hold on to EUR/USD short with a wider stop at 1.0670. Meanwhile, we'll be closely watching EUR/GBP to see if the near term fall from 0.9304 would reverse. And in that case, we "might" switch the position to GBP/USD short. But we'll just keep an eye there first.

EUR/USD Weekly Outlook

EUR/USD dropped to as low as 1.0365 last week as recent decline resumed. The break of 1.0461 support also indicated larger down trend resumption. Initial bias remains on the downside this week for next near term target at 100% projection of 1.1298 to 1.0518 from 1.0872 at 1.0092, which is close to parity. On the upside, above 1.0524 minor resistance will turn bias neutral and bring consolidations before staging another decline.

In the bigger picture, break of 1.0461 key support indicates that consolidation from there has completed as a triangle at 1.1298. And, the down trend from 1.6039 (2008 high) is resuming. Current downtrend is now expected to target 61.8% projection of 1.3993 to 1.0461 from 1.1298 at 0.9115. On the upside, break of 1.1298 resistance is needed to confirm medium term bottoming. Otherwise, outlook will stay bearish in case of rebound.

In the long term picture, the down trend from 1.6039 (2008 high) is still in progress and there is no clear sign of completion. We'd expect more downside towards 0.8223 (2000 low) as long as 1.1298 resistance holds.

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Of the three major European central banks held monetary meeting on Thursday, all left their policy rates unchanged. Moreover, all pointed to higher uncertainty in the global economic outlook. BOE kept its Bank rate unchanged at a record low of 0.25%. The sizes of government and corporate bond purchases also stayed unchanged at435B pound and up to 10b pound, respectively, in December. Policymakers warned that the recent strength in sterling might cool inflation in the medium-term. SNB held deposit rate steady at -0.75%, while Norges bank left kept its deposit rate steady at 0.5%.

BOE: While leaving the monetary and QE measures unchanged, the members affirmed that 'monetary policy can respond, in either direction, to changes to the economic outlook as they unfold to ensure a sustainable return of inflation to the +2% target'. In the concluding paragraph, the central bank reiterated that it 'remains committed, as always, to taking whatever action is needed to ensure that inflation expectations remain well anchored, and that inflation returns to the target in a sustainable fashion'.

The members acknowledged the recent rally in longer-term interest rates, attributing it partly to US' new fiscal policy. The members noted that if the US loosens its fiscal policy, it 'will help to underpin the slightly greater momentum in the global economy evident in a range of data since the summer'. On exchange rate and inflation, BOE suggested that the +6% rally in trade-weighted sterling since the previous meeting, notwithstanding higher oil prices, would 'point to less of an overshoot in inflation relative to the target in the medium term, though month-to-month volatility was to be expected as market participants' views on the United Kingdom's future relationship with the European Union continued to evolve'.

On the global economic outlook, BOE warned that 'the global outlook has become more fragile, with risks in China, the Euro area and some emerging markets, and an increase in policy uncertainty'.

SNB: Also as widely anticipated, the deposit rate stayed unchanged at -0.75%. The target range for the three-month Libor steadied at between –1.25% and –0.25%. However, Governor Thomas Jordan left the door open for further easing, noting that 'we cannot rule out that a further step lower will become necessary'.

SNB welcomed FOMC’s rate hike decision, noting that it is a 'positive sign that the world is moving in that direction' and that the US economic conditions are improving. It also hoped that the Fed’s move would help normalize global monetary conditions. While USD strength should ease the appreciation pressure of Swiss franc, SNB reinstated that the franc remained 'significantly overvalued' and pledged 'willingness to intervene in the foreign exchange market are intended to make Swiss franc investments less attractive'.

The central bank warned that the world economy is subject 'considerable risks', in particular the 'multitude of political uncertainties' facing Europe.

Norges Bank: Surprisingly, the central bank kept the bottom of the rate path at 40 bps. This reflected the concerns over the increases I housing prices and financial stability. As Governor Oystein Olsen noted in the press conference, 'financial imbalances have been building up for quite some time related to the high growth of debt in the household sector and accelerating housing prices… That trend has continued recently, and forms part of the background for our decision on the interest rate'.

Swiss National Bank leaves expansionary monetary policy unchanged

The Swiss National Bank (SNB) is maintaining its expansionary monetary policy. Interest on sight deposits at the SNB is to remain at -0.75% and the target range for the three-month Libor is unchanged at between -1.25% and -0.25%. At the same time, the SNB will remain active in the foreign exchange market as necessary, while taking the overall currency situation into consideration. The SNB's expansionary monetary policy is aimed at stabilising price developments and supporting economic activity. The negative interest rate and the SNB's willingness to intervene in the foreign exchange market are intended to make Swiss franc investments less attractive, thereby easing pressure on the currency. The Swiss franc is still significantly overvalued.

Compared to September, the new conditional inflation forecast has been revised slightly downwards in the short term. This mainly reflects the fact that inflation in October and November was slightly lower than expected. The SNB nevertheless anticipates an unchanged inflation rate of -0.4% for 2016. For 2017, however, the forecast is down to 0.1%, from 0.2% in the previous quarter. For 2018, the SNB now expects inflation of 0.5%, compared to 0.6% in the third quarter. The conditional inflation forecast is based on the assumption that the three-month Libor remains at -0.75% over the entire forecast horizon.

The global economy has continued to recover in line with the SNB's expectations. In the US, third-quarter GDP growth was again significantly above potential. Furthermore, the situation on the labour market continued to improve. The other major economic areas also recorded favourable economic activity in the third quarter. The euro area and Japan continued to register moderate growth, while in China, growth remained strong thanks to a variety of fiscal measures. In the UK, the economic impact of the Brexit decision has so far proved less pronounced than originally feared.

Full release

The Fed increased the policy rate by +25 bps for the first time in a year. While this had been widely anticipated, the 'dot plot' indicated that the members expect three hikes in 2017, up from two previously. The accompanying statement was in a hawkish tone, upgrading the assessments to the economic outlook. The members reinforced that 'near-term risks to the economic outlook appear roughly balanced. Fed Chair Janet Yellen made no hint on how the new fiscal policy would affect the monetary stance. Yet, she stressed there is non-negligible uncertainty regarding the new policy.

On the economic assessment, the FOMC acknowledged that the employment market has continued to 'strengthen', with 'solid' job gains and 'decline' in the unemployment rate seen in recent months. It noted that economic activity has expanded at 'a moderate pace since mid-year'. Household spending has risen 'moderately' but business fixed investment has remained 'soft'. Inflation has 'increased since earlier this year', compared with November statement’s 'increased somewhat', but is still below the Committee's +2% longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports'. It also noted that market-based measures of inflation compensation have 'moved up considerably', compared with November statement’s 'moved up', but still are low. The Fed suggested that the accommodative monetary policy would continue to support 'some further strengthening in labor market conditions', The use of the word 'some' signals that the Fed judged that the market is now close to operating at full employment.

As the press conference, Yellen indicated that it’s 'far too early' to judge the effects of fiscal policy on the Fed’s policy stance but cautioned the 'considerable uncertainty' around the fiscal policy under Trump’s government. She added that 'fiscal policy is not obviously needed to provide stimulus to get back to full employment' and noted some risks of loose fiscal policy, including an elevated debt-GDP ratio and the possibility of inflationary overheating. Yellen left the door open for staying after her term ends in February 2018. While it is a custom for Fed chairs to leave the central bank after their terms expire, Yellen could stay on as a board member as her 14-year term on the Fed’s board of governors doesn’t expire until January 31, 2024. President-elect Donald Trump has indicated that he would likely replace Yellen after her term ends.

Yellen downplayed the median projections of three rate hike in 2017, compared with two previously, emphasizing that the change was 'modest' and only represented a small shift in the thinking of several committee members. The forward guidance in the statement also reaffirmed that the current 'economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate'.

Recent releases in China's November macroeconomic indicators suggest that growth continue to stabilize. Yet, weakness in renminbi means that capital outflow should remain a headache. China's growth in industrial production (IP) improved to +6.2% y/y in November, from +6.1% a month ago. This came in better than consensus of +6.1%. Retail sales expanded +10.8% y/y in November, compared with expectations of +10.2% and +10% in October. Indeed, this is the fastest pace of consumer spending growth so far this year. A key contributor to the upside surprise was auto sales, thanks to government tax incentives. Meanwhile, 'single's day earlier in November also helped boost sales of electronics and telecom products. Urban fixed assets investment gained +8.3% in the first 11 months of the year, unchanged from the year through October. This came in line with expectations.

On inflation, headline CPI accelerated to +2.3% y/y in November from +2.1% a month ago. The improvement mainly came from the food inflation which rose to +4% y/y from October's +3.7%. This was in turn driven by the large +15.8% gain in vegetable price. Core CPI also rose to a 3-year high to +1.9% y/y, from +1.8% in October. This compares with January's low of +1.2%. PPI inflation rallied to +3.3% y/y from +1.2% in October. This beat expectations of +2.3%. The month-over-month rally (+10.3%) of coal and mining materials prices was the biggest driver. The recent trend suggests that risks on inflation for the coming year is skewed to the upside and rising inflation would also push the nominal GDP growth higher.

The country's FX reserve continued to decline, shrinking –US$ 69.1B to US$ 3.05 trillion, in November. Capital outflow in China continued and has been worsened by persistent depreciation in renminbi. USD's rally has exacerbated the weakness in renminbi with USDCNY soaring to the highest level since 2008 last month. Besides selling foreign currencies to support renminbi, the Chinese government has tightened capital control. A Reuters report last week suggested that the State Administration of Foreign Exchange (SAFE) had begun vetting transfers abroad worth US$5M or above and was increasing scrutiny of major outbound deals. In response to the restrictions, the American chamber noted that it was 'concerned about the added burden such approval requirements may potentially have on our member companies' ability to move money overseas'. The EU Chamger criticized that 'the unpublished window guidance on the control of capital outflow is disruptive to EU companies' regular business operations'

ECB surprised the market by announcing tapering plan for its bond purchases program. The Governing Council decided to extend the program until December 2017. However, the pace would slow down to 60B euro per month from April 2017, compared with the current 80B euro. The market generally anticipated ECB to extend the program for 6 months without changing the pace of purchases. The market was disappointed. German yields spiked to a one-year high. The single currency soared to a one-month high of 1.0872 immediately after the announcement. However, gains were erased with EURUSD dropping more than -1%, as ECB left the door open to extend QE further beyond December 2017 and/or pick up the pace of bond buying again if the economic conditions deteriorate. Despite disappointing in first sight, the ECB has indeed delivered more than the market had anticipated: 9 months*60B euro = 540B euro vs consensus of 6 months*80B euro = 480b euro. Has the ECB has again disappointed the market by doing more?

At the press conference, President Mario Draghi indicated that the "calibrations" announced reflect the "moderate but firming recovery of the euro area economy" and the "subdued underlying inflationary pressures". He added that the members still expect the region's economy to recover at a "moderate but firming" pace with the risks to growth are skewed to the downside. In answering a question regarding the advantage of extending QE for 9 months at 60B euro per month, over an extension for 6 months a 80B euro per month. Draghi noted that ECB wants to ensure a sustained pressure on market prices, without distorting them of course. He affirmed that the reduction in size does not mean tapering. There were also some changes in the parameters of the QE with the ECB now allowed to buy government bonds which are yielding less than its deposit rate of -0.4%. Moreover, there are some changes to its securities lending program with cash now accepted as collateral.

The Governing Council also released its latest staff economic projections. GDP is now expected to grow by +1.7% in 2016, unchanged from September's projection, and remain steady at this rate in 2017 (September: 1.6%). However, growth would then moderate to +1.6% in both 2018 and 2019. On inflation, the Eurosystem staff forecast HICP to reach +0.2% this year, unchanged from September's projection, before accelerating to +1.3% in 2017 (September +1.2%), +1.5% in 2018 (September +1.6%) and +1.7% in 2019. At the press conference, Draghi admitted that inflation forecast of +1.7% in 2019 is not close enough to the +2% target. Draghi believed rising oil prices would eventually feed into inflation. He, however, warned that one should see if "it's just a one-off effect, whether it has any secondary effects, and if it effects inflation excluding energy costs".

Draghi attempts to calm the market by noting that the program "goes until December 2017 or beyond, if necessary, and until we see a sustained rise in inflation". He added that today's move was made with "very, very broad consensus".